US Risk Retention Final Rule: Playing it Forward for CLOs

We will leave the hand wringing and teeth gnashing to others. We expect there will be a lot of that in the days ahead. We have had our say on the misguided premises and tortured statutory interpretation underpinning the final risk retention rule as it applies to collateralized loan obligation transactions (“CLOs”). The result from the agencies is what it is. Namely, the portions of the final rule germane to the CLO market were enacted largely unchanged from the second notice of proposed rulemaking, although, importantly, the cash trap proposed in the second notice of proposed rulemaking, whereby a CLO could not make distributions to the sponsor holding an eligible horizontal residual interest, except proportionate to the pay down of the CLO liabilities, was dropped and the agencies added significant color in the adopting release for the final rule that the requirement that the sponsor “organize and initiate” a securitization transaction, namely that the sponsor must have “actively participated in the organization and initiation activities that would be expected to impact the quality of the securitized assets…typically through underwriting and/or asset selection”. Unfortunately, the final rule represents a big bag of nothing when it comes to the relief the industry was anticipating for CLOs. Thus, in this OnPoint our focus, after a brief explanation of where we stand from a U.S. risk retention perspective, will be on the road ahead and possible options that exist for sponsors (both managers and funds) under the final rule, cognizant that no one size will fit all.